What is franchise financing?
Franchise financing is a type of financing, often a small business loan, that allows franchisees to pay the costs associated with purchasing, opening, and operating a franchise. This loan allows you to cover start-up costs and day-to-day expenses without depleting your initial investment or personal savings.
Depending on the franchise, the franchisor may provide some type of financing. The UPS Store is one example that offers franchise financing options. If direct financing is not provided, the franchisor may have an established relationship with a financing source. For example, McDonald's does not offer loans, but it does partner with many national financial institutions.
Additionally, franchise owners typically must meet minimum net worth and/or available capital standards. For example, Ace Hardware requires a franchise applicant to have at least $250,000 in cash and a minimum net worth of $400,000.
Franchise financing options
bank loan
Banks and credit unions offer a variety of financing options for franchise businesses.
For example, Bank of America offers franchise financing, including SBA loans. And Balboa Capital, a division of Ameris Bank, will finance first-time franchise operators. Some banks have financing programs for specific franchises, like the McDonald's financing program offered by Wells Fargo and his US Bank.
Bank business loans may have the most competitive interest rates and repayment terms, but they require strict criteria to qualify. Obtaining a franchise loan from a bank or credit union typically requires good credit, strong finances, and several years of business experience. You may also be required to provide collateral to secure financing.
SBA loan
SBA loans are issued by participating financial institutions (usually banks or credit unions) and are partially guaranteed by the U.S. Small Business Administration. When looking for franchise financing, SBA 7(a) loans and SBA CDC/504 loans are options to consider.
Although SBA 7(a) loans can be used for a variety of purposes, SBA CDC/504 loans should be used to purchase long-term equipment or large fixed assets such as existing buildings or land. However, both have long repayment terms and competitive interest rates.
To qualify for an SBA franchise loan, you typically need good credit, a multi-year business history, and a solid financial standing. Although the SBA no longer regulates which franchises are eligible for financing, SBA lenders may scrutinize the franchises they finance.
To obtain an SBA loan for franchise financing, the lender must also determine whether you meet the SBA requirements for all loans. This may include an in-depth look at your personal finances, business size, business plan, collateral, and personal and corporate guarantees. .
online loan
If you don't qualify for a bank or SBA loan, or if you need faster financing, online loans are a good alternative for financing your franchise.
Online lenders typically have more flexible requirements than traditional lenders and can often fund your application within a few business days. These lenders may also be willing to work with startup franchises and business owners who have credit issues.
Online lenders can offer many different types of financing, including term loans, lines of credit, and equipment loans. Some companies, like ApplePie Capital, specialize in franchise financing.
However, compared to bank or SBA loans, online loans typically have shorter repayment terms and higher interest rates.
franchisor financing
Your franchisor may offer you some type of financing. This may include reduced or waived fees, direct financing, or partnerships with third-party lenders to help franchisees obtain financing.
For example, 7-Eleven has an internal program that funds up to 65% of franchise fees. The UPS Store works with Guidant Financial to help franchisees with financing and offers discounts on franchise fees to eligible veteran- and minority-owned businesses.
However, not all franchisors offer funding, and the options available vary by company. You can check the franchisor's website to see if they offer franchisee financing or contact the brand directly for more information.
Personal loans and HELOCs
Certain types of personal loans, such as home equity lines of credit (HELOCs), can be used for business purposes, so it may be worth talking to your lender or banker. Personal loan amounts may be lower than business loan amounts, but they may also have fewer fees and a faster application process.
Rollover as a Business Startup (ROBS)
Some franchisees use ROBS to invest in their new business by withdrawing funds from their 401(k) or other retirement accounts, often with the help of an attorney or ROBS provider . ROBS comes with risks and may require hefty fees, so you should think carefully before choosing this option.
friends and family loans
If you have friends or family who have the wherewithal to invest in your business, you may seek a loan to get your franchise off the ground. If someone offers you a loan, you should create a loan document that specifies the details and terms of the loan to a family member or friend to distinguish between a personal relationship and a business transaction.
How to get a franchise loan
To obtain financing for your franchise, follow these steps:
1. Create a business plan
A business plan provides detailed information about your business goals and can also be helpful when seeking funding. An executive summary, market analysis, financial projections, and funding requests are important elements included in a business plan.
2. Decide what type of financing you need
You need to know the type of business loan and how much capital you need, what funds are available for a down payment, and how much debt you can tolerate. If you're just starting out with franchising, you might consider franchisor financing or online loans.
More established franchises may have broader financing options, such as bank or SBA loans.
3. Check your business qualifications
Most lenders will use your personal credit score, business hours, and annual revenue to evaluate your business loan application. Cash flow, financial accounts, available collateral, and franchise brand may also be considered.
It's a good idea to check your credit report and financial statements in advance to understand the current status of your business. Federal law allows you to obtain a free credit report each year from the three major credit bureaus.
4. Look for ways to enhance your borrower profile
In addition to strong credit and financial standing, there are other things to consider to strengthen your borrower profile. Providing collateral in the form of assets such as real estate or equipment can help with the approval process and may even result in more favorable terms. Also, adding a cosigner to your business loan can help you get the loan if your borrower profile isn't strong enough on its own.
5. Research and compare lenders
Once you understand your financing needs and business qualifications, you can focus your search for a lender accordingly. For example, if you have good credit and an established financial history but need a quick loan, you might start looking into online lenders like Funding Circle or OnDeck.
You should research and compare multiple financial institutions to find the best one for your business.
6. Submit your application
Applying for a franchise loan varies greatly depending on the financial institution and loan type you choose. The bank or his SBA loan company can slow down the process if you use a document-heavy application. You may be required to visit a branch location in person to submit your application.
Online lenders, on the other hand, tend to have streamlined applications with minimal documentation.
However, you will typically need to provide the following:
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Basic information about you and your business.
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Franchise details, including franchise agreements.
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business plan.
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Personal and corporate bank statements.
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Personal and business tax returns.
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Business financial statements.
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Additional information if necessary.
If you are considering purchasing commercial property or equipment, you will also need to provide information and valuations of the property or machinery you plan to purchase.
The time it takes to receive funding after submitting your application varies by financial institution and loan type. While some online lenders can fund your application within 24 hours, SBA loans can take anywhere from 30 days to several months to get funded.
find the right business loan
The best business loans are generally those with the lowest interest rates and the most ideal terms. However, other factors, such as time to funding and business qualifications, will help determine which option you choose. NerdWallet encourages you to compare small business loans to find the best fit for your business.
